Entry and exit dynamics of nascent business owners

Abstract

This paper reports a comprehensive study on the dynamics of nascent business owners using a unique longitudinal matched employer–employee dataset. We follow over 157,000 individuals who leave paid employment and become business owners during the period 1992–2007. The contributions of this paper are twofold. First, we analyze both entry and exit, identifying and characterizing different profiles of individuals leaving paid employment to become business owners, and distinguishing exits by dissolution from exits by ownership transfer. Second, we provide new evidence on how particular experiences in the labor market and entry modes shape the post-entry dynamics of nascent business owners. By differentiating between different entry and exit routes, this paper provides new evidence on different human capital patterns among nascent business owners and on key determinants of entrepreneurial survival. Our results suggest that different exit modes can be predicted by business owners’ entry route. Furthermore, different exit modes exhibit different duration dependence patterns according to the entry mode. Additionally, the paper shows that businesses started after a displacement episode are not necessarily less successful. Those individuals entering entrepreneurship after being displaced due to previous employer closure are found to persist longer.

Keywords

Entrepreneurship Business ownership Entry Exit

Electronic supplementary material

The online version of this article (doi:10.1007/s11187-015-9641-5) contains supplementary material, which is available to authorized users.

JEL Classifications

Notes

Acknowledgments

We acknowledge GEE—MEE (Gabinete de Estratégia e Estudos—Ministério da Economia e do Emprego) for allowing the use of Quadros de Pessoal dataset. We are grateful to José Varejão and two anonymous referees for their comments and suggestions on a previous version of this paper. The first author also acknowledges FCT (Fundação para a Ciência e Tecnologia) for financial support through the doctoral grant SFRH/BD/71556/2010. CEF.UP—Centre for Economics and Finance at the University of Porto—is funded by FCT (Fundação para a Ciência e a Tecnologia); project reference: PEst-OE/EGE/UI4105/2014.

Number of different firms where the individual has already worked as paid employee until period t

Recent displacement caused by previous employer’s closure

Dummy = 1 if the individual has exited (in t-1 or t-2) a previous job in a firm that closed down

Recent displacement caused by previous employer’s downsizing

Dummy = 1 if the individual has exited (in t-1 or t-2) a previous job in a firm that suffered a significant downsizing (greater than or equal to 30 % of the workforce, with a minimum number of 5 displacements)

Experience in the sectora

Number of years of experience (as paid employee) in the sector (2-digit) where the individual has entered as business owner

Macroeconomic environment

Lagged unemployment rate

Annual lagged unemployment rate (1-year lag)

Entry modea

Start-up entrepreneur alone

Dummy = 1 if the individual becomes a Nascent Entrepreneur by establishing a new business alone; 0 otherwise

Start-up entrepreneur shared

Dummy = 1 if the individual becomes a Nascent Entrepreneur by establishing a new business with others; 0 otherwise

Acquisition entrepreneur alone

Dummy = 1 if the individual becomes a Nascent Entrepreneur by acquiring an existing business alone; 0 otherwise

Acquisition entrepreneur shared

Dummy = 1 if the individual becomes a nascent entrepreneur by acquiring an existing business with others; 0 otherwise

Intrapreneur alone (employee buyout)

Dummy = 1 if the individual becomes the only BO of the employer firm; 0 otherwise

Intrapreneur shared (partnership)

Dummy = 1 if the individual becomes one of the BOs of the employer firm; 0 otherwise

Individual-level characteristics

Male

Dummy = 1 for males, 0 for females

Age

Age of the individual in years, in period t

Age squared/100

Squared value of the age of the individual in period t, divided by 100

Less than 9 years of schooling

Dummy = 1 if the individual has less than 9 years of schooling completed in period t, 0 otherwise

9 years of schooling

Dummy = 1 if the individual has 9 years of schooling completed in period t, 0 otherwise

12 years of schooling

Dummy = 1 if the individual has 12 years of schooling completed in period t, 0 otherwise

College education

Dummy = 1 if the individual has a college degree (including masters and/or PhD degrees) in period t, 0 otherwise

Previous wage job characteristics

Overeducation

Dummy = 1 if the individual was overeducated in the previous wage job, 0 otherwise

Tenure

Tenure of the worker in the previous wage job, in years

Tenure squared

Squared value of the individual’s tenure in the previous wage job

Management position

Dummy = 1 if the individual occupied a top management position in the previous wage job, 0 otherwise

Hourly wage

Ratio of the base wage over the total number of normal hours worked in the reference month (wages in 2005 constant prices). Values in logs

Micro firm

Dummy = 1 if the firm where the individual was previously employed had less than 10 employees, 0 otherwise

Small firm

Dummy = 1 if the firm where the individual was previously employed had between 10 and 49 employees, 0 otherwise

Medium firm

Dummy = 1 if the firm where the individual was previously employed had between 50 and 249 employees, 0 otherwise

Large firm

Dummy = 1 if the firm where the individual was previously employed had 250 or more employees, 0 otherwise

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